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Bank geographic diversification and funding stability

Author

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  • Sebastian Doerr

Abstract

The recent banking turmoil has renewed focus on banks' branch networks and deposit taking activity. This paper provides novel evidence that the geographic diversification of banks' deposit base enhances their funding stability. I establish that banks with greater diversification exhibit higher dispersion in deposit growth rates across their branches; and lower volatility in deposit growth rates over time. Subsequently, banks benefit from lower deposit rates, partly by shifting from time deposits to cheaper demand deposits. These patterns are consistent with diversification improving funding stability. I then show that deposit diversification spurs banks' liquidity creation and small business lending, with positive effects for real economic activity. The funding stability channel of geographic diversification is distinct from previous findings on banks' asset-side diversification. It also highlights benefits of branch networks for bank lending that go beyond local information acquisition.

Suggested Citation

  • Sebastian Doerr, 2024. "Bank geographic diversification and funding stability," BIS Working Papers 1221, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1221
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    References listed on IDEAS

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    1. Evan Gatev & Til Schuermann & Philip E. Strahan, 2009. "Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 995-1020, March.
    2. Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
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    5. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
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    8. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
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    Cited by:

    1. Sebastian Doerr & Mathias Drehmann, 2026. "The liquidity coverage ratio a decade on: a stocktake of the literature," BIS Papers, Bank for International Settlements, number 164.
    2. Ramos-Francia, Manuel & Karlström, Peter & Montañez-Enríquez, Ricardo & Ossandon Busch, Matias, 2026. "Stranded in the wastelands? Natural capital depletion and bank deposit reallocation," Journal of Banking & Finance, Elsevier, vol. 184(C).
    3. Islam, Emdad & Singh, Mandeep, 2025. "Geographic diversification, climate risk, and bank lending: Evidence from farm loans," Journal of Financial Intermediation, Elsevier, vol. 63(C).
    4. Liang, Shuo & Moreira, Fernando & Lee, Joosung, 2025. "Bank geographic diversification and market competition," The Quarterly Review of Economics and Finance, Elsevier, vol. 102(C).
    5. Brei, Michael & Cornelli, Giulio & Gambacorta, Leonardo & Hofmann, Boris, 2026. "The Digitalisation of Banking and Social Media: Implications for Deposit Pricing," CEPR Discussion Papers 21609, Centre for Economic Policy Research.

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    Keywords

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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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